The Day Ahead: Ripping Through the Fluff

 | Jul 10, 2012 | 8:30 AM EDT  | Comments
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Stock quotes in this article:

aa

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wdfc

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amd

Do I have coverage on the aluminum sector? No. In fact, I don't even sip drinks from aluminum cans,  and the use of WD-40 no longer is part of my life. (Gosh, I detested spraying that poison on dad's chainsaw at the tender age of eight.) However, I do have a burning passion for identifying management nonsense -- usually a heaping dose of optimism -- and the true messages in any sort of press releases a publicly traded company throws in the direction of eager shareholders.

On Monday evening, pure unbridled insanity arrived on the scene to kick off earnings season. The market sniffed this stuff out with WD-40 (WDFC), sending the stock down after hours, and gave Alcoa (AA) a momentary pass as the CEO painted a picture straight from the boom era of 2006-07, although that couldn't be further from reality. The Alcoa interview really upset me. I know a CEO is always supposed to put on a brave face but, come on, there has to be a way to articulate the items shareholders globally are currently seeing (weakening macro thesis) into a sense of realistic guidance for the near and medium term. If the CEO would just be forthright, perhaps the market could properly re-price the stock and then leave the runway open for a period of beat and raises that would expands the P/E multiple while earnings per share remain depressed.

Anyhow, I reckon that Alcoa, WD-40, and Advanced Micro Devices (AMD) answered none of my pre-earnings season concerns.

Could a badly beaten industrial sector be bought on the "kitchen sink guidance theory?" No. Early reporters Alcoa and WD-40 are clinging to optimism (Alcoa reiterated its global demand forecast and WD-40 only sees earnings near the low end of its range -- as opposed to initiating a new range).

Has the market priced in all the bad macro news into valuations? No. WD-40's stock dove despite management attempting to soothe the masses with only a modest earnings warning.

Is the market appreciating things nobody is discussing? No. There was a 25% year-over-year increase in WD-40's inventory, which is far removed from the sales run rate. Go ahead and make adjustments for costs, but I bet the core units are not where management wants them to be.

Turning to Advanced Micro Devices, if its sales only downshifted a gear toward the end of the second quarter, what in the world will the third quarter look like for comparable companies?

Ripping Through the Fluff

Alcoa

  • In-line earnings per share not so sexy: Expectations were not robust by any measure and revenue beat by $150 million. I see a company continuing to adjust on the fly to fast changes in demand in a key part of its business.
  • CEO interview: Resembled the first quarter in which he overselling of the story. (Recall what I said yesterday on this topic.)

WD-40

  • European sales have declined 3%, year-to-date, yet management sees flat "at best" for the year. Implies second half rebound of some sort. Right.

Advanced Micro Devices

  • Sizable revenue warning further validates a string of tech warnings and the underperformance of the Nasdaq last Friday.

Segment Preview

I am scheduled to be on the Fox Business Network today at 12:40 p.m. EDT to chat about fun stock stuff, of course. One stock pick of mine will be Logitech (LOGI). The name fits the three key broader parameters I have set for stock selection this earnings season: (1) strong, positive market response to first quarter earnings, (2) the stock has outperformed the major indices during the latest pullback, and (3) there is a Fed-Ex (FDX)-like fundamental catalyst in the mix.

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